Tax Strategy: Proactive Planning with Tax Attorney Megan Robin

Melissa Shanahan: Most law firm owners treat taxes as a yearly headache, but the ones who build real wealth see them as a strategic lever. In this episode, we explore how proactive tax planning can help you not only save money, but also grow and protect your wealth over time. From assembling the right financial team to breaking free from cookie-cutter advice, this conversation reveals how smart tax strategy can completely change your financial future.

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Melissa: All right, everybody. Hi, and welcome to The Law Firm Owner Podcast. This week, we have a guest that I'm very excited about and a bit of a funny story into how she came into my world. So, I'm very glad that you did. Megan Robin, welcome to the show.

Megan Robin: Thank you. Thank you for having me. I'm excited to be here.

Melissa: Absolutely. About a little over a month ago, there was a call scheduled on my calendar, and I knew you were a lawyer. I knew that you had your own practice. I did not know what the call was about, but to my delight, I learned about who you are and what you do, and you were basically reaching out to tell me that you exist so that maybe our listeners and our audience could also get to know you a bit. And I'm very glad that you did because I think you fill a gap in the market that is very needed. So, would you please share just where you are, what you do, and a little bit about your background?

Megan: Yes, absolutely. So, I'm based in California. I've been an attorney for 13 years. I have an LLM in tax law, and I own my own law firm where I help law firm owners optimize their personal and business finances through tax strategy, which is a fancy way of saying I help my clients keep more of what they earn.

Melissa: Yes. I am very glad to know you. I don't remember if I told you this, but about a year ago, we had a group called Syndicate. And I wanted this event to be centered around wealth and wealth creation for themselves. And that's not my wheelhouse.

So I searched high and low trying to find someone that would be a good speaker or could come in, and I found a couple of great speakers, but there really wasn't someone that does what you do, which is what I was looking for. So anyway, I met you a year late, but I'm still very glad to have met you and excited to maybe open you up, open our world up to you a little bit more.

Megan: Yeah. When I entered this space, I was surprised as well that there are not more attorneys working in this space and more people doing this kind of level of tax strategy because it's so needed and so necessary. So, it is interesting that there is this large gap in the marketplace that lawyers can really benefit from when running their businesses.

Melissa: Yes. I think we talked about on our call that, in my other life, my former life, I was in the dental world, and there is all kinds of strategy. You can find very easily someone to be able to help you if you were a doctor that owns your own practice. And for some reason, it's just different in this world. So, yeah, excited to have you here. 

Well, today, you and I had planned, we're going to have a series of conversations in the coming weeks, but today, we had planned to talk about tax strategy as a wealth-building tool for lawyers. I guess the place that seems most natural to open up is that when people hear, when law firm owners hear tax strategy, they tend to think about paying their taxes and April 15th and sort of that deadline. But I want you to speak to how this is different. The work that you do with clients is different than just tax or preparing for taxes.

Megan: Yeah, absolutely. So what I do is proactive tax strategy, which means planning ahead. That's what we're doing. Because when most people, you're right, they don't think about taxes until they're coming up on a filing deadline. And usually at that point, it's too late. There's not a whole lot you can do to move the needle at that point.

What you really need to be doing is thinking ahead. So, looking at things like, how is your business structured? How and when do you pay yourself? How are your investments being managed? What is your retirement plan look like? These are all things that you're preparing for throughout the year and thinking about as a bigger picture strategy.

Melissa: Tell me, why is it important for lawyers who may have, depending on their business and depending on how established their business is, they may have unpredictable income or cash flow. So, why is it important for them to think about taxes as a wealth-building tool? 

Megan: Yes, it's a huge deal because taxes are something you're going to pay every year until the day you die for most people, and it's a huge overlooked area.

So when you think about taxes, this is if someone is overpaying, say they're overpaying $50,000 and $100,000 a year in taxes, which I see all the time, that means they're losing a competitive advantage from other law firms because if you have $50,000, $100,000 less than another law firm to invest in your in your people and hiring and marketing, whatever it is you're working on, or if it's to meet your personal goals.

So whether a lot of people come and they want to fund college for their kids or they want to retire early, et cetera, every lack of optimization is you're losing competitive edge, you're losing funds to move in the correct direction.

The other thing I think people forget to think about is when we, a lot of people, think of taxes as kind of a necessary evil, and you can't do anything about it. It just is what it is.

However, that's not how the tax code works. So the tax code is structured to raise money for the government. Most people understand that, but also it's incentive-based.

So the best way to think about this is with an example. So recently, there were a lot of tax incentives around electric cars. A lot of people were familiar with that. You could get credits, deductions, things like that for energy, incentives, et cetera. So the thing that the tax code is doing is it's incentivizing certain behaviors. It's rewarding those behaviors. So when the tax code does that, guess what? More electric cars sell. So it's altering the behavior of people.

And the same thing goes when you think about it on a broader perspective. So, the tax code rewards things like investing in real estate, starting your own business, giving to charity. These are areas where the tax code offers free gifts essentially. You will pay less if you structure it correctly.

So when I'm looking at a tax plan, I'm looking at where can we maximize the benefit that's available to you. I think a lot of people don't realize that the IRS is not going to call you and say, Hey, you missed this and you could have you were eligible for that, and if you restructured this way, you would have paid less. That's on you to do so. So there's not going to be a call from the IRS saying you're overpaying. So that's where I come in and help people structure their cells in a way that makes sense.

Melissa: You just said that you often see instances where people are paying $50,000 to $100,000 extra in taxes that they wouldn't have needed to. How does that happen? That much money? How big are the firms that you're talking about? I don't know, can you give an example of how it can add up that quickly?

Megan: So it depends. Those are for the larger firms, where you have higher incomes, but I also recommend so based on how you're structured, if you're a sole proprietorship, for example, you're going to be paying a lot of self-employment taxes, for example, or if you're a partnership that's structured incorrectly, so partnerships are really fun.

I don't want to get too in the weeds with this, but they're really cool because you can change how the income and losses are allocated between the partners to make it most tax advantage as opposed to with corporations where you're locked into your shareholder, you know, how many shares you get is how much of the business you get, et cetera.

So, depending on how you're structured, we're also looking at what tax bracket you're in. So you may be leaving money on the table by not contributing enough to your retirement and not getting those deductions or contributing too much if you're in a situation where you're already in a really low tax bracket, but you're ramping up.

So I had an attorney who was a personal injury attorney, and he knew that in a few months, we were at year-end, in a few months, he would be having a lot of cases closing in the new year. And so we knew that he was going to jump several tax brackets. He was going to go from around 25% to almost 37%, which is a big chunk of your earnings.

And so we were, a lot of times, with people focus on, oh, deduct everything right now. A lot of CPAs do that because they want to show you those big wins right away. So they'll say, oh, you know, get all your expenses in before December, deduct everything that you can. But with someone like him, no, we want to save those deductions for next year when he's in a higher tax bracket. We want to time things differently. If anything, we were pushing cash, as much cash through as we can this year in those lower brackets, doing some backdoor Roth conversions, things like that.

And so I know we'll probably get into this later, but with this cookie-cutter advice that you get on YouTube, which I get a lot of YouTube people come to me saying, I saw this on YouTube, and I want to do that. That kind of advice can be really dangerous if you don't look at exactly what's going on in your specific situation. 

Melissa: The way that you just said that, I find that a lot, even with just anything to do with business health. People hear advice, and they either implement it or they come to us and say, I want to do this, I saw this. I'm like, okay, but for your situation, that's not, you have to really understand what's going on under the hood in order to make the right decisions. It's no different for you in your world when you're working with clients. There's not a blueprint for how to do this, doesn't sound like.

Megan: Absolutely.

Melissa: One question I have that came to me as you were talking, how do you work with accountants? Or do you ever talk to people's accountants? Is it basically, Okay, Mr. Smith, here's your plan, and then they take it to their accountant? Like, what's the integration look like between you and the accountant?

Megan: Yeah, that's a really good question. So, to back up, maybe I'll go over kind of how I see each person on your financial team, and then I can tell you how I weave myself into that. So, most people have an accountant. They're an integral part. I love accountants. I work very closely with them.

Accountants generally, I mean, they run the gamut. It's like in any profession, the level of experience and the services that they offer will vary widely. And so most people come in with their accountant, and I have to kind of figure out what level are they at, where is there. Sometimes there's big cleanup to do, you know, there's we're fixing a lot of things, there's a lot of handholding. Other times their accountant’s excellent. We have the groundwork we need, and I'm just building off of that.

But to give context, so accountants are historians in their traditional role. So they're taking everything that happened throughout the year and consolidating it, putting it on the right lines on the tax return, making sense of your financials, and filing your taxes. They're looking backwards.

So unless they're doing some proactive tax strategy with you, usually they're just reactive; they're not proactive. And usually it's, you know, like we talked about already, it's too late at that point to do anything very meaningful.

I think generally most of them are pretty good at the kind of basic deductions, things like that. Most of them will catch that, but they don't have an obligation to do so unless you hire them as a tax strategist, which is usually separate from kind of that basic filing fee that you would pay an accountant to handle.

And so I think that's something a lot of people are surprised by. They also don't realize that under the accounting umbrella, their goal is to the public policy and to compliance. It's not, they're not true fiduciaries to you unless you've hired them to be a fiduciary for you. It's a, it's a separate standard.

So I think that surprises people, too. They'll come to me and say, Well, why is my accountant not flagging this? Why are they not letting me know of proactive strategies? And unless they're trained to do so, which a lot of them actually now are getting advanced trainings and offering separate services.

But if you just go to someone, you dropped your box of receipts on their desk and say, Do my tax return, you're more than likely not going to get that. So I think having people understand what their role is, what their traditional role is and what they're trained to do is tax compliance as a historian.

So that's that role. And then a lot of people come in with financial advisors. This is kind of an interesting term. So, financial advisors, most of the time, what they come in with is an investment advisor, which is financial advisors is a broader term, and a lot of them are trying to do kind of some low-level tax strategy, but it's usually only related to the investments themselves. So we see a lot of backdoor Roths with them, tax loss harvesting, things that affect their stock and bond portfolio directly. So that's what you'll see with a lot of financial advisors.

And so the way that I work is I come in with your existing team, and I fill in the gap because what I've seen is most people have these teams. A lot of times, if there's real estate involved, they'll have brokers, sometimes, they'll have business attorneys doing their LLCs or S Corporations. Estate planning attorneys doing their estate plans or wills and trusts, the CPAs, you know, documenting what happens each year, and the financial planner is handling the stocks and bonds.

So you've got a lot of people who are a little bit siloed in their areas of expertise. And so I come in as almost a quarterback, and I look at everything that everyone is doing and make sure that it's aligned because these are a lot of really moving pieces.

Understanding how they each affect each other is a really big deal because if you pull one lever over here, it affects everything else. It's almost a domino effect. And that's something that I've seen where advisors are they mean well, and they'll advise on something, but they won't know that the client actually has this piece of real estate or this business idea that's about to launch. And they're not mind readers.

You know, so a CPA might say deduct everything this year and not know that you have cases closing in January that are going to push you out to the next tax brackets. So it's not on them, they're not mind readers, you know.

And so I come in, and my goal is to ask those kinds of questions, to understand your big picture and make sure that you're clear on your goals about what you want to achieve.

Melissa: It's so good. I, how needed this is for people, because they may feel like they have everything taken care of. They have an accountant, they have a financial advisor, but it's almost like you don't know what you don't know, and that's where you can come in and bridge the gap for them based on where they're going and what matters in their own world.

Megan: Yeah, absolutely. 

Melissa: It's really cool. Okay, can you give us some examples of cookie-cutter advice? You mentioned this earlier, people see things on YouTube. So, what is an example of some cookie-cutter advice that law firm owners may receive that is actually hurtful?

Megan: Yeah, there's a ton. I could go on and on, but one of them that I think gets people into hot water a lot, especially law firm owners, is that you'll be in a lower tax bracket in retirement. This one can be dangerous.

So a lot of the kind of more conventional tax strategies are save for retirement, max out your retirement funds. You'll hear this from almost all accountants and financial advisors. You get that big juicy win on the front end, where it's, oh, I got this big deduction, I paid less this year.

But I really want to watch out for that, and I really grill my clients about what does your retirement look like? Because a lot of the law firm owners, I see a lot of type A, I see a lot of highly entrepreneurial people who have not only the law firm but a lot of other things going on.

So, I see a lot of real estate investing. I see other businesses, side businesses that will continue on, a lot of intellectual property type things that, you know, will not fade with age. So they've written a book, they have podcasts, they have other things.

And so, assuming that you're going to be in a lower tax bracket later in life is not always true. I just had a client come through who had a lot of things going on like this, and then on top of that, her husband passed away, and her husband had a sizable pension. So she's getting these large pension payments, and then she had social security payments, and with all of that income, she was in a higher tax bracket than she was previously.

And so you can't assume, you know, we have to look at, are you going to keep working? Are you going to have income from your real estate investments? Are you going to have a pension or some kind of, you know, from your work, especially a lot of people have W-2 earner spouses. So even though they earn, you know, their own law firm, you have spousal income. Oh, she had life insurance payments as well from her husband's death. So sizable life insurance payments.

Melissa: Oh, wow. Yeah.

Megan: And so you have to think about all of these different pieces. And so with her, it was a kind of a big project. Okay, how can we move things around? How can we shelter things? These have trickle effects, too, because your social security benefits are based on your earnings. And so if you're a high earner, you it can change your benefit structures, your health care structures, Medicare is based on that as well. Higher-income earners have higher premiums for their Medicare payments.

So we're really careful, and we really want to be careful about are you actually going to be in a lower bracket later? And if we shovel these huge amounts of money into retirement plans, how do you get it out? Because most of them are not, they're pre tax, so you get a deduction, it grows tax free and then when you take it out, you pull it out at ordinary income rates.

Whereas, so sometimes if I don't see a dip, then we're going to start moving money slowly, maybe through Roth, in Roth accounts, or paying the tax now, or other kinds of investments. But that is one of the ones that I think gets people in hot water, especially law firm owners with these kind of personalities, higher incomes, so they're more likely to go into other business ventures, more likely to have investment real estate, that sort of thing.

Melissa: Yeah, yeah. That's what I had, I have not heard that one, but that makes sense that people would naturally think that may be what happens for them after they're slowing down at the firm or getting out of the firm. Okay. Do you have another one in mind? 

Megan: Yeah, so let's see. Maybe hire kids is a huge one.

Melissa: You don't think we should?

Megan: No, so it depends. And so it's kind of hire everyone. So hire kids is the big YouTube strategy. There's a couple things we want to be careful with here. So first, and so they'll hire other people, parents, etc., trying to just get their family on payroll, you know, so they can take that deduction, move the money to a lower tax bracket. But you can kind of step in it in a few ways with this.

So first, you need to track it. No, willy nilly, I'm just going to put baby John on, you know, give him $100k a year. Like, what is he actually doing for the business? These do get audited. You need to pay attention, track him like a normal employee, what kind of services, pay him normal amounts.

And so it's funny because it's like, for a while, there was using your kid for marketing. And unless your kid is like Blue Ivy and you're Beyonce, you know, you can give Blue Ivy a million dollars for an appearance just because people want to see her. That's how much her photos go for. So if she does a music video, you know, she can go for millions or whatever or any of these celebrity children, but if your child is not a celebrity, you've probably cannot pay them $100,000 for an appearance on your ad.

So, being a little more reasonable, you also have to watch state-specific rules. And so YouTube, obviously, hits the whole nation and the whole world, but California, for example, does not allow children under 14 to work in your business, in any commercial business.

And so, yeah, so it's tricky. I, even in California, this is a very controversial issue. There's a lot of attorneys, well, I don't know as much the attorneys, a lot of accountants who are still saying, it's fine. I kind of got into a debate, actually, with another attorney who said they're still doing it because no one's ever been caught. And in my opinion, that is not good legal advice to say, Do it, you won't get caught. That to me is, I don't run that way. I'm conservative, follow the law, that's my goal.

But you do have to watch that and know that is a risk. So if your account, if you are in California or any state that has a lot more, like is a lot more strict about child labor laws, pay attention because you might get away with it on your tax return with the IRS, but you could get caught with the labor department in your state for not allowing. There's really strict rules, how many hours the kid can work. It has to be after school and on weekends. The younger kids, it can only be in a family business. There's some exceptions for domestic work and farm labor, and things like that we don't need to get into.

But that's one too that is a YouTube strategy because some states, you can be as young as seven. And so for those, you know, even six, I think, I'm not totally sure on that, but…

Melissa: Yeah, I think I thought it was seven, and I don't think I realized that varied from state to state. But of course, okay, yeah.

Megan: Yeah, so California 14, which is a huge bummer. I mean, California is, has the highest income rates in the nation. They are very business-not-friendly. And so I do a lot of work for California law firms because it's a tough state. It's a tough state from a tax perspective, from a business perspective.

Melissa: Employment perspective.

Megan: Yeah, employment as well.

Melissa: Yeah.

Megan: Yeah, there's a lot of tips too, like real estate professional status. California does not recognize it, doesn't recognize 529s for K through 12, which is a huge bummer. So, you know, a lot of people were really excited when some of the new tax laws made it, you know, from a federal perspective, K through 12, you could use your 529 kid accounts. But California's not allowing it, and it doesn't pan out. Like I've crunched the numbers, and with the California penalties, you're still not ahead.

Melissa: Yeah.

Megan: So, yeah, state-specific stuff can really throw a wrench into some of these kind of YouTube strategies that you see online.

Melissa: Also, I think people, I would like this, so I would imagine listeners would like this. You just said you're pretty conservative and you abide by the law. I wonder if people tend to think that a tax strategist may be, you know, cutting corners and doing things you're really not supposed to do, but hiding it well enough, and that's not how you roll. And even being conservative and really abiding by the law, you can save people a lot of money.

Megan: Yeah, that's a really good point because that is a common misconception. It's really funny. I had my teeth cleaned the other day, and the dentist was like, What do you do? And I told him what I did. And he's like, oh, like the Montana license plate stuff. And I was like, what? I had not heard of this. So I googled it.

Apparently people are going to Montana, buying really expensive cars, like Ferraris or whatever, because Montana doesn't, you don't have, it's like less sales tax, less license and registration fees, and all this stuff, and then driving the car back to California, which is completely illegal, totally illegal.

Like California has a rule, like if you're living here, if you're domicile here, like your home, your work, etc., and if you're driving the car around here, then you need to pay taxes here. So, going to Montana does not do anything. But it was funny because his thought was like, oh, you do those crazy illegal loophole things. And I'm like, no. Oh my god.

Melissa: I mean, what's cool is you don't need to do those things in order to save yourself a lot of money.

Megan: Not at all. Like it's such a fundamental misunderstanding. I think a lot of you see it a lot in real estate YouTube videos, too. They'll say, pay zero in taxes and all this stuff. And it's like rooted, like everything like that, it's like all sayings and stereotypes are rooted in this grain of truth.

Like you can do a lot with real estate. You can play with, you know, depreciating it on paper and all this stuff. But you're not like, you don't need to go into illegal world. Like, you can make it clean and honest and all of that. Like because you're not ahead. Like, if you're doing all of this and then you get audited, you end up behind because you're paying penalties and all this stuff if you get caught. And I want people to sleep better at night knowing that they're building this true foundation, not that they're doing some weird back-door stuff that is no good.

Melissa: Can you share a story from a law firm owner who benefited from personalized tax strategy instead of just doing it the standard way that people know how to do?

Megan: Yeah, so this one's a good example for what we were just talking about. So she came in, she wanted to do the hire everyone kind of strategy. And thankfully, her daughter is 16, so we were able to do her daughter, but she also was considering hiring her mom, who she's fully supporting in every way, financially, paying for her medical bills, her housing, everything.

And so on its face, this seemed like a good idea. Okay, you know, deduct it through the business, hire the mom. The mom's able body, able mind, it would have been, but when we crunched the numbers, I realized that it made more sense for her to claim her mom as a dependent and then use other strategies around that, and helping her mom using her HSA and other things to pay for her mom's health care expenses. That ended up being a better option.

And if she had gone forward and hired her mom, then her mom would have made too much money and not been able to be claimed as a dependent, because a dependent, you have to be supporting them a certain percent. There's all these rules essentially to claim an adult as a dependent.

And so we realized that kind of strategy wouldn't have made sense. Like she was going to save more money on taxes by claiming her mom as a dependent than she would be hiring her and shoveling money that way.

Another issue, too, which I think can be tricky, especially with our higher-income earners, is this individual did not realize how close she was to the estate and gift tax limit. So, in this year, the estate and gift tax limit is 13.99 million, and then next year it'll be 15 million. This sounds like a lot. And so I think a lot of people, and that's for an individual single. Married filing jointly, it's double.

This individual was unmarried single practice. So she was at that, we'll just call it 15 million for ease. She didn't realize she was at that level because when you think about your estate and gift tax limit, you need to look at how much money are you earning each year and what is your entire portfolio worth.

So she had a lot of real estate. And so in her mind, she had bought, you know, maybe this one for $500,000, this one for $400,000. But when we looked closer, a lot of these properties had appreciated massively. So now they're worth 2 million, 1 million. And when you add all of that up with her retirement savings, her yearly income, and all the properties, she was right at that limit, which means we're changing her strategy massively.

So, an example, another example is people say fill your 529 accounts for your kids. This is generally good advice. They're tax advantaged. You pay no tax, you know, as it grows, and then when you pay for college. But for someone like her, if you're on that line where you're about to pay estate and gift taxes, which is 40%.

So that's a 40% chop of any money you and money that you put in the 529 for your kid, that's a gift. And so it would take a 40% haircut by giving her kid money to put in the 529.

However, there's a carve out in the tax code that says if you pay the educational institution, so the college, if you pay the college directly, straight from you to the college, it doesn't count for the estate and gift tax limit. So for her, I said, no more 529. Do not gift any money to your child. You're going to get a 40% haircut on that. So instead, we're going to have you pay directly to the college so that it doesn't count for the estate and gift tax limit.

So we don't want her to go higher and higher. And she's still alive right now, so it's, you know, but if she passed away, everything, when you pass away, everything goes to fair market value at the date of death. So, instead of that property you bought for $500,000 is valued at a million at that moment. So you have to think about what is your estate worth in this moment in time, not what you bought it for, et cetera, which you see a lot of things appreciate, stock and bond portfolios appreciate, real estate appreciates. And so if you're getting borderline or you're close to that limit, you need to really think carefully about how you're gifting.

Melissa: That's a great example. That's a great example.

What are some of the biggest mistakes you see law firm owners make when it comes to tax planning?

Megan: Not planning at all. That is the biggest one or assuming that their accounting is doing it when they're not. They assume their accountants to do it. They're just if you pay a filing fee and hope it's done, you know. 

Melissa: They, I mean, people, I have a fair amount of clients that think they do a decent job with tax planning, and that's not my world, and I don't try to insert myself there, but I know they're not working with a you. I have one client that's working with a tax attorney for tax strategy. Everybody else is not. And they feel pretty good about what they're doing, you know? But I just wonder what's left on the table. And so, anyway, so not tax planning at all, even though you think you might be, is that really planning?

Megan: Yeah, and it's interesting. I think because of the misconceptions, the misunderstanding of what the CPA's role is and what the financial advisor's roles are. And the irony here is, I should flag this, it's important to talk about is, you really want to look at how your advisors are charging and what they're promising to do. So what one of the big roadblocks I think to people hiring a tax attorney is they think, Oh, it's going to be really expensive or I need to be a billionaire to need that. Like, I don't need one if I'm not, if I'm normal, you know.

However, the irony there is the biggest problem I see, which is a huge shock for a lot of law firm owners that come to me, is that they don't realize how much their financial advisors are charging. So this is a big issue worth talking about.

So most financial advisors charge what's called AUM fees, called assets under management fees. And it's a percentage of the assets that they are managing for you. And so if they're managing a million dollars for you, then they take a percent of that, and a pretty common.

So if you went to somewhere like an Edward Jones, like you go on their website, it says on their website, 1.5% AUM fee. Most people think, oh, okay, doesn't sound like much, 1%, you know, no big deal. But 1.5% of a million dollars is $15,000 a year, every year. And people don't realize they're paying this because you'll never receive a bill or any kind of invoice. It's being siphoned directly out of your account, out of your portfolio that they're managing for you.

And so I had a client who was having about 3 million managed by their financial advisor, and then with that on top of some like flat fees that they were being paid as well, they're paying about $60,000 a year in financial advisory fees. And I flagged it, and I said, Oh, did you know that this is what this is coming out to? And they had no idea.

A lot of times, the financial advisors will break out the bill. So if you look at an actual statement of your portfolio, which they usually will give you upon request, or some, there'll be little line items, 100 bucks here, 1,000 bucks here, but they don't bill it all at once either. So it's not like you see, oh my gosh, $60,000 just came out of my account.

I think, especially now, we've been in a bull market for a long time. And so a lot of really good returns. And so when your portfolio is growing overall, it's easier to not see that. You know, I think a lot of times it gets caught more in bear markets where people are losing a ton, and then they still have to pay the AUM fees as well. And people start getting a little more, they start asking a little more questions.

But the irony there is these are huge chunks. So if someone says, Oh, I, you know, tax attorney, too expensive. I'm like, you're paying $60,000 a year, not one time, a year for someone to just, you know, kind of passively run your stock and bond portfolio.

I would also say when looking at fees, just as kind of to flag for people because this is such a hard area where a lot of people just don't understand what's going on, and they get overwhelmed with finances, so they dump it on the lap of the advisor, and they're like, okay, I'm done.

But another thing you want to look at is not only are you facing these AUM fees, plus a lot of them will do these almost, I think they're red herring flat fees. So people think, Oh, my advisor's $3,000 a year. And that's all they, you know, they focus on the flat fee. So usually they'll have a flat fee, you'll have your hidden AUM fee, and then a lot of times these advisors will invest in their kind of in-house funds or funds that they get kickbacks and commissions for.

And a lot of these mutual funds are actively managed funds, meaning they have really high expense ratios. And so that's a drain on your portfolio as well, paying these really high expense ratios, whereas if you invest in something like a passive total stock market index or an S&P 500 index, that's a passive index; those are not actively managed, they have really low expense ratios. And so you're not spending tons of money.

And the whole idea, obviously, this isn't an investing episode, but the whole idea is you want compounding growth, you know, so the more that you're pulling out of your account, the less that you want to compound. So compounding obviously is your earnings earning earnings. So the money you earn is earning its own earnings, and it just grows exponentially.

That's the fundamentals of, you know, if you've read anything by Warren Buffett or some of those kind of investing gurus, is the power of compounding. That's what we're trying to do. So if you're siphoning out of all these excessive fees, you're not going to get where you want to go.

And so part of the review that I do for my clients is I look at what's going on there. Is, you know, how much, you know, what are you paying? Are you aware that you're paying this? Do you have excessive fees? Do you have unnecessary products? So a lot of these investment advisors, financial advisors, they're what's called a dual registered broker-dealer.

So they're allowed to wear two hats. They can wear their hat as a financial advisor. They're allowed legally to call themselves a fiduciary, even though I have some qualms with that. They also can wear a hat as a salesperson. So they can sell you annuities and insurance products. They can sell you funds. They're salespeople.

And most of the contracts that I've seen are drafted to where the onus is on you, the client, to understand when they're switching hats, and you have to ask if you're unsure. So in the same sentence, they can switch hats. They can say, I'm a fiduciary, I have your best interest. I also think you should buy this annuity. And it's on you to ask.

Melissa: I mean, this is so, I know some of this. No, no. I don't know some of this. I couldn't teach this, but I've heard some of this before, and I know it's really important to be in the know, but it's so frustrating to hear how this is set up because the game is rigged, and if you don't know what you're doing, you will never build the wealth that you could have. And for some people, that is the difference between night and day. For some others, maybe it's not so stark, but I just think this is the, it's such an issue with the hidden agendas that exist with the people that you think you can trust. So, ugh, I just…

Megan: It's really hard. I had a client come through, and they were in a high tax bracket. So they're subject to the highest capital gains rate, so 20% for capital gains, so gains on stock and bond, dividends, things like that. And then if you're in a high tax bracket, you're hit with another tax called the net investment tax, it's net, um, another like three and a half percent. And so I look at her return, I'm like, why are you paying so much in like, what's going on in your portfolio? And I looked, and I saw that her contract said that her advisor would get fees like these kind of kickbacks and commissions if they do a lot of trading. And so they were doing a lot of trading, which was triggering capital gains on her tax return. 

Melissa: Yeah.

Megan: And so I sat down with her and said, You should never be trading unless you have a reason to. So are you rebalancing your portfolio? Are you liquidating to do, move money for another type of investment? If you're not, if you can't answer yes to either of those, you should not be trading.

Melissa: Yeah.

Megan: And so he was just doing it to trigger those commissions, to move things. So, yeah, it's very… 

Melissa: Yeah. I mean, but…

Megan: I’ll get on my soapbox about this, like it’s…

Melissa: I mean, it really does, I think, that's what I was trying to do last year when I was having, I wanted some people to come in that may not have all the answers. I didn't find like the person I wanted to find.

We had a couple of great people in there to come and speak, but I do feel a responsibility for opening up my clients and or listeners, and viewers' eyes to people that you can trust. Like people that you should gravitate towards because it's almost sort of I wish and I hope I get better and better at this as time goes on, that I could do this in my own world and from a certain respect, but not with what we're talking about right now.

And I want them to be able to decipher signal from noise. And there's a lot of noise out there and a lot of people that have great charisma and are good salesmen, you know, even if they get the tag fiduciary, it's still like to your point, you, there's still some things underneath that may not be quite what's in their best interest at all times.

And so, anyway, you feel like someone who it's signal. And I'm hoping people can attune to this and it's a starting point for people to be able to reach out to you, to have a conversation with you so that even if it doesn't make sense to work together, you know, and we could talk more about that in a in a in a little bit, but even if it doesn't make sense to work together, they still can hear some sound advice about maybe where to turn, where to look, what to look at specifically that seems like there may be something there and so

Megan: Yeah. It is a really common. Like that is one of the ways that people find their themselves to me. Like my last client that just hired me was came in and she said, my financial advisor is telling me not to purchase this building. I want it as investment real estate. And I looked at it, and to me it made a lot of sense.

And then what I realized is if she pulled about a million out, he'd lose 15 grand in AUM fees a year. So that's why he was saying. And so they say it, so the way that they sell it, if you ever find yourself in these financial advisor sales room, is they say, AUM fees put us on the same team because when your assets grow, mine, I have incentives to grow your assets because when it grows, I get paid more. So that's the sales pitch.

Melissa: It sounds great.

Megan: It does sound great. They're excellent sales people. Like, but the downside is that they're going to do everything that they can to make sure that they're managing assets.

And so if you pull out money to buy a building or you pull out money to pay off high interest debt or you want to manage your kids 529s on your own, then your interests are no longer aligned because they're going to give you advice to not pull money out to do these other things which are usually financially good, paying off debt, investing in real estate.

These are things that will help you on the long term.

But they're not going to advise it. And so she came and said, You know, I trust him, and I've worked with him for a decade, but I'm I really think buying this building is, you know, and I can't tell you buy a building or not, but I can say this is what was in your contract. This is what he stands to lose if you do it, you know, this is what it will how it will affect your entire portfolio.

And so I think getting a clear-eyed perspective and understanding where your incentives are not aligned. And it's hard because I have been looking high and low, and if someone's listening to this, that's a financial advisor who's flat fee, call me. I will send you so much work. I cannot find them. They're unicorns.

I've found some that have more reasonable AUM fees, so lower. And I've found some that will help people invest in index funds and passively managed funds. You know, so it's not these expensive overpriced managed funds.

So I've found a little bit of a lesser evil, I guess, but if anyone's listening that does flat fee, call me because it's a huge need because this is not, I hope people are not saying, oh, financial advisors are bad or investment, because it's a needed service.

Investing can be very complicated, and having someone guide your investments, help you allocate your portfolio, how much in stocks, how much in bonds. What is your risk tolerance? Do you want to play with things like muni bonds, you know, because they're tax-free? There's so many cool, great things that you can do.

So if there are people out there that are excellent in that world, in that stock and bond space, they're so needed. So it's not a knock on the profession, it's a knock on the way that it's being structured right now.

But I don't, not to be pessimistic, but I don't see that changing because it's so incredibly lucrative to charge the AUM way because you don't have the resistance of having to bill and the fact that 90% of people don't know what they're paying, it's a lot, you know, because most people aren't going to sign a $60,000 check to pay for that. But they'll easily let it be siphoned out. And so it’s so effective.

Melissa: Only because they can't see it.

Megan: Yeah, you can't see it. So it's so effective, it's so lucrative that I just I really doubt that they're going to dump that model. I wish they would, thoug,h because I think their services are sorely needed.

Melissa: I mean, right now, it seems like if you were going to break away from that model and truly be flat fee, it's such a good time to do it because there are people who would refer a flood of customers your way, and you'd be doing great. So, anyway.

Megan: Yeah, I think so.

Melissa: Call Megan. 

Megan: We need someone to blaze the trail. Yeah, some brave financial advisor.

Melissa: Yes, yes. I did have another question that came up in my mind. So I have a fair amount of clients that use fractional CFOs.

Can you speak to that role as it pertains to the team? Because a lot of people either consider using one or they are using one. Do you have any opinions or thoughts off the cuff?

Megan: Yeah, I think they can be a great way for a business who's not big enough to have like a full-time CFO in the office.

Because financials, it's beyond, so the accounting role that we've talked about so far was just tax filing. That is not the same as someone who is your bookkeeper or someone who is, you know, helping you decide, can we make this purchase? They know the numbers on a day-to-day basis. So someone like a fractional CFO can be really helpful so that you don't have the cost of a full-on CFO in-house. So I think they're great.

Bookkeepers are huge too, especially with law firms, it can get complicated, especially, you know, you have to have things in your IOLTA trust account and then you're moving things. The bookkeeping is not as simple as it can be in some other businesses.

And so I think that's an absolutely can be a great tool to help people kind of keep track of their finances, especially when things get, the firm gets bigger, and things get more complicated, and you have payroll and all of this.

Melissa: Yeah. Okay, okay. Good to know.

When it comes to how often law firm owners should revisit their tax strategy, I would love to hear what you have to say about that. And then are there certain events, life or business, that should trigger a review?

Megan: Yeah, absolutely. So there's some obvious ones, major changes. So you're bringing on a partner, you just had kids, you are doing something like buying a piece of real estate, you're getting a divorce, something that's going to affect your finances overall. Those are obvious ones, those are ones where you want to check in.

But also at least annually, at least, because a lot of things change, a lot of things change over the year.

Another one is if you're newer, so I was helping a newer law firm owner who was having a lot of income fluctuations and still building.

And so for them, I created a phased approach where we hit certain income targets, and when he hit those, we meet to figure out, okay, when you get this big payout, or you land this big clien,t or close this big case, what are we doing with those funds?

So that we're acting with intention. Because a lot of times, people, they get their momentum, they're starting their firm, and then the money just drops in a savings account, and we have no plan, they're surprised by taxes.And so if you're in a really big phase of your of your, like a growth phase, we're going to meet more often.

If you're in a winding-down or slower phase or you've been stable for several years, we may not have to do as much work on a year-to-year basis. We may just have the big plan on the front end, and then we're kind of on a maintenance plan, making sure everything stays the same.

But life happens. You know, things happen. People have kids, they change their goals, they have surprise, you know, they'll lose an employee they didn't expect.

So whenever something changes, but the ramp-ups, I spend the most time with the newer law firm owners because we're saying, okay, even with the higher income earners, there's always a tension between how much money you have and what you want to do with it, right? So even if you have a lot of money, you might say, I want to buy this building or I want to expand my practice and those are expensive things to do.

And so you're looking at all the different options available to you and picking a path. And every time that you pick that path, you know, you close some doors and others open.

So you may decide, you know, it's a finite pool of resources that you have. Am I going to use this $50,000 to hire an employee? Am I going to use it to fund my kid’s 529? Am I going to use it for my own retirement?

You know, you have a finite pool and you have to decide what doors am I going to close right now, which am I going to open, what do I prioritize, what makes the most sense from a tax perspective, and that way we can stretch your money and make it work harder for you and make sure you're not leaving money on the table that can be used to further your goals and get you there sooner.

Melissa: For a busy law firm owner who is juggling a lot, client work among other things, what is the first thing that they can do to be more proactive instead of reactive when it comes to taxes and tax planning?

Megan: Yeah, the first kind of big picture thing, which I'm sure you hammer with your clients all the time, is know your numbers because you can't change something if you have no idea what's going on in your books. So that's kind of the very, very start, the first thing you should do.

And then the second, as listeners know, we've covered a lot of ground, there's a lot of areas that you want to look at from business structure to how you pay yourself, to retirement, which is a lot. And so, to make it easier for people, I have a checklist, a free checklist on my website that covers all of the areas you should be thinking about.

And as you go through those, you can mark them off. And if there's big gaps, that will alert you that you may be leaving money on the table or there may be areas where you need to strategize more.

So my advice would be run over there, get that freebie, download it, and run through all of those different topics, a lot of which we've covered today. So it'll be an easy kind of reminder for you to give you some of that big picture guidance, and so that you can kind of back up a little bit, look at your big picture, and see where you are.

Melissa: It's great. I want to, I want to get it. Can I go do that too?

Megan: Yeah.

Melissa: Okay. Do you only work with law firm owners?

Megan: No, actually, I don't. I so I focus on it. It's funny because I kind of fell into the niche because all of my initial clients were law firm owners.

I think a lot of it was because word of mouth. So the biggest way that I get new clients is people will say, Oh my god, she saved me so much money, you need to talk to her. She knows what she's doing. So it's a referral-based thing, and I think lawyers know other lawyers, you know, from law school or in their practices.

So it happened by accident, but I've done work for engineers, med spa owners, all kinds of other doctors, other people come in the door too, but I focused on law firm owners just because they're fun to work with, they're great clients. They understand what I do.

You know, they understand it's, it can be complicated. Obviously, I try to make everything easy to understand, but there are moments where it's like, okay, we're going to do something a little more sophisticated. I want you to understand exactly what we're doing.

And so mostly professionals. So a lot of, you know, doctors, lawyers, those kinds of people who kind of understand the, you know, what we're doing here and why it's valuable.

Melissa: Yeah, absolutely.What client is, I think everybody should go get the checklist, but I'm just curious, what type of client is too small or not ready to work with you yet? Assuming they have their books in order. So if they have their books in order, is there a net worth amount? Is there like how would do you have a good answer for that?

Megan: Yeah, so if you're not paying much in taxes, there's not a whole lot I can do for you. So, if you're in, you know, if you come to me and you paid, I don't know, 10 grand in taxes and you're in the lowest tax bracket, way to go, you know. Like usually the issue there is you need to earn a little more income because that will push you up.

So sometimes even though, you know, every now and then there's an individual who was in a really low tax bracket but was ramping up to do big things. And so I think I mentioned earlier, there's things we can do like Roth conversions and pushing some cash through while you're in those lower brackets.

So it's not always a no, you know, if there's other things going on. But if you're not paying much in taxes, you don't have a lot of income coming through, it's not a concern yet.

A lot of times, I do get the higher bracket people because they're saying, you know, between state and federal, it's like, oh my gosh, half of everything I earn is gone. And that's when people start getting a little agitated, you know, and that's where we start, you know, putting a little more work in there to help work with that.

Melissa: Okay, no, that's great. That's, I think helpful, because you know, we have listeners from at all ends of the spectrum here.

You know, some people that I don't think many people listen to this podcast that don't want to grow or aren't focused on growth or how to get their hands around the growth. Most people that are listening are growing or trying to grow.

And I think if they are, this should be on their radar, whether it's a little early or not, but um, it should be on their radar. And to your point, maybe having milestones of when they hit certain, you know, income, then that's when they'll have the next conversation or, yeah. Okay.

Megan: Yeah, because if you're getting started, there are a lot of things that we can do to get you set up correctly for when the money starts flowing in.

So it is very case by case. If I look at it and I say, okay, you need, we need to get you set up correctly, we, I see your potential and all of these things going forward, then it can be an option.

So the way that I work is the first thing that a client will do if you reach out to me through my discovery call on my website. You set up one of those. We'll talk, we'll see if it's a good fit.

If it is, then I'll have the individual send me their most recent tax return. So this year, that would be their 2024 tax return.

I take a look at it and to see if there even is opportunity. Because I don't want to waste your time or mine by having you hiring me on and charging you anything if I can't save you anything. My goal is always to save my clients more than I end up costing them. That's the goal. So save them a lot of money in taxes. If I can't do that, then it's not a good fit.

So usually I look at that. I talk about, we'll talk quite a bit before, I before someone engages me about what are their goals, what are they trying to do, where do they see themselves going. And then we'll decide if it makes sense to work with each other.

Melissa: Okay, last question that I have for you is if a law firm owner wants to build long-term wealth and still protect their cash flow, what is a mindset shift that they're going to need to make about tax planning?

Megan: So the biggest thing that I want to communicate is to see taxes not just as this burden or this thing that you have to pay every year, but see it as the opportunity that it is.

So for a lot of people, their business, so their law firm, is their biggest asset. And the mistake that I see people doing is they'll focus on the returns they're getting say in their stock and bond portfolio or with their real estate, but they won't see, focus on the returns they're getting through the law firm.

And that's a lot of times their biggest income generator. They're not, you're not getting rich over, oh, maybe I got 10%, you know, growth in my stock portfolio or, you know, the rent payments on, you know, obviously real estate can be its own business of its own, but on a just a passive rental down the street, you know, a lot of people will focus really intensely on that.

Maybe, oh, we need to do more with the stock fund, or we need to do muni bonds, or we need to do this annuit,y or whatever it is that they're doing. But then, ignoring their biggest asset, which is your firm. That's generating more than all of these other investments combined.

And so seeing that for the opportunity it is, and maximizing that in the same way that you're trying to maximize your other portfolios. And a lot of people do a lot of tax strategy, tax loss harvesting, and all these other things in their stock and bond portfolios. They're doing depreciation and cost segregation and all these things with their real estate, but then ignoring this huge asset where tax strategy would move the needle more than it would in these other areas.

And so that mindset shift can really help people and move them closer to their financial goals a lot sooner.

Melissa: Yeah, that is, I mean, it what struck me as you were just talking about that is the work that I get to do with clients, I see how when they're the health of the business improves, their top line income improves, their net income improves, everything gets better.

But just thinking through what you just said, I guess what struck me is the opportunity of that asset, not only to improve the health of it so that you are optimizing it so that it is as healthy as possible, and giving you the return that it should be giving you as the owner. I think people don't focus enough there.

And then also, what you're saying is they don't, they don't think about strategy with it, you know, from a tax perspective. You're right, they do focus on their rental property or properties and, um, their portfolio that is just not as valuable as their firm.

And if they took that more seriously and were of the mind that this is the most important asset that I have, and so as much attention as I give everything else by default, I'm going to give here, everything would get better. Yeah, that's really great.

Megan: Yeah, absolutely.

Melissa: Yeah.That's great. Well, okay, thank you for coming on. This is your first time here. We definitely found our groove. And you're coming back. So, I'm I know listeners will be excited about that. Thank you for your time.

Megan: Yes, thank you for having me. This was fun.

Melissa: Yeah. Okay, link is in the show notes to go grab the PDF that Megan has on her site for you. And I highly encourage anyone who was intrigued by this conversation to schedule a discovery call, get to know Megan, and see if it makes sense to work together. Thanks, Megan.

Megan: Yeah, thank you.

Melissa: This content is for informational purposes only and does not constitute legal, tax, financial, or investment advice.

Melissa: Hey, want to watch the video of this episode? Head over to Velocity Work’s YouTube channel. You’ll find the link in the show notes.

You may not know this, but there's a free guide for a process I teach called Monday Map Friday Wrap. If you go to velocitywork.com, it's all yours. It's about how to plan your time and honor your plans so that week over week, more work that moves the needle is getting done in less time. Go to velocitywork.com to get your free copy.

Thank you for listening to The Law Firm Owner Podcast. If you're ready to get clearer on your vision, data, and mindset, then head over to VelocityWork.com where you can plug in to quarterly Strategic Planning, with accountability and coaching in between. This is the work that creates Velocity.